Policy Priorities

Policy Priorities image of kids

Budget Watch: This Week ...

January 11, 2013

What the Fiscal Cliff Deal Means for Children

In the early hours of January 1, 2013, the Senate approved the fiscal cliff package in a 89-9 vote, which the House of Representatives approved late that evening by a vote of 257-167. While the legislation will protect more than 100 million families earning less than $250,000 a year from significant income tax increases, set to take effect this month, the package raises just $620 billion in new tax revenue (maybe $750 billion counting interest savings). This is a far cry from President Obama’s request for $1.6 trillion in new revenue, and it does little to address the deficit. The Center for American Progress calculates that President Obama and Congress have now successfully enacted $2.4 trillion in deficit reduction since the beginning of fiscal year 2011; however, both Republicans and Democrats agree that additional deficit reduction must occur and the fight over spending cuts versus new revenues is sure to continue in the coming months.

Some of the key components of the fiscal cliff package include:

  • A tax increase for the richest one percent of taxpayers by allowing the Bush era tax cuts to end for families with an income above $450,000, and individuals with an income over $400,000. The deal makes about 82 percent of the Bush era tax cuts permanent, which will make it difficult to ensure sufficient revenue for investing in children, given the current focus on deficit reduction.
  • Tax breaks for low-income working families including the Child Tax Credit, The Earned Income Tax Credit, and the American Opportunity Tax Credit, were extended for five years – in contrast to the permanent extension of most of the Bush tax cuts.
  • A one-year extension of unemployment insurance, benefiting those who are unemployed for longer than 26 weeks. This keeps benefits flowing to two million unemployed workers on the verge of losing their federal checks.
  • Sequestration delayed for two months. Half the cost of the delay will be offset by discretionary cuts, split evenly between defense and non-defense.
  • The Alternative Minimum Tax will be permanently fixed to avoid raising taxes on the middle-class.
  • A nine-month farm bill fix was also attached to the deal, extending federal dairy policies through September and thereby averting a threatened doubling of milk prices. SNAP was untouched in the package but a nutrition education program was cut for 2013.

Unfortunately, the deal does NOT extend the payroll tax holiday that had been in ARRA, so payroll taxes will rise for all Americans. They will grow from 4.2 percent to 6.2 percent. This will result in a significant cost for the lowest-income taxpayers and cost a $50,000 earner about $83 a month.

As a result of the deal, three big issues must be dealt with in the next 60 days.

  1. The deal did not address the debt ceiling that must be raised by February 15th, if recent estimates are correct. President Obama has warned that he will not negotiate on the debt ceiling, and will require $1 in new revenue for every $1 in spending cuts.
  2. The deal postponed the sequester (across-the-board cuts evenly distributed between defense and non-defense discretionary spending) until March 1. Recent reports suggest that this may replace the debt ceiling as the Big Fight, where Republicans believe they have maximum leverage to extract large cuts (in spending or entitlement reform). Large cuts in addition to those already enacted to non-defense discretionary programs and entitlement programs such as Medicaid and SNAP would hit low income children and families disproportionately; and
  3. Finally, the deal did not provide funding for the remainder of fiscal year 2013. The Continuing Resolution, which is keeping federal funding flowing, expires on March 27. If continuing funds are not appropriated, the federal government will shut down.

It is now expected that the State of the Union Address will be held on February 12, and that the President’s FY 2014 budget, normally released early in February, will be released in March.

We will continue to monitor these issues closely, so check back soon to learn more!

Click here to view past Children's Budget Watch updates.